Europe’s advanced biofuels wish – a €25 billion blunder

The Commission’s ‘strategy’ to phase out conventional biofuels in the hope that they will miraculously be replaced by ‘advanced’ biofuels in Europe’s transport energy mix isn’t backed by science or logic, writes Dick Roche.

Dick Roche is a former Irish minister for the environment and a former minister for European affairs. He is currently an advisor to the Hungarian company Pannonia Ethanol.

The EU Commission’s Renewable energy directive RED II proposals are about to be discussed behind closed doors in trilogue in the coming weeks.

A core element in the Commission’s ‘strategy’ is to phase out conventional biofuels in the hope that they will miraculously be replaced by ‘advanced’ biofuels in Europe’s transport energy mix. The proposals are not backed by science or by logic.

They are grossly out of step with what is happening elsewhere in the world. If they are enacted, they will represent one of the biggest blunders the EU has ever made – a blunder with a price tag well in excess of €25 billion.

Remarkably the ‘price tag’ for phasing out conventional biofuels, the investment funding needed to provide Europe with the volume of advanced biofuels envisaged and the vast indirect costs of what the Commission is proposing have, so far, been effectively ignored in the REDII debate.

In 2015 the CEO of Spain’s renewables giant Abengoa warned that the Commission’s dysfunctional policies were turning biofuels into a “zombie industry.” His warning proved to be all too accurate. Abengoa collapsed in Spain’s largest-ever corporate bankruptcy. International banks’ exposure at the time of Abengoa’s collapse was said to stand at over €20 billion.

Abengoa was not the only victim of EU policy shifts. Across the EU, biofuel plants have been ‘mothballed’ or closed down completely.

Investments worth billions have already been written off as a result of EU U-turns on biofuels. The half-billion Euro Vivergo plant, at one point the largest industrial project in England, is a monument to confused biofuel policy.

Turning to the investment needed to realise the Commission’s objectives the EU will require more than 15 billion litres of ‘advanced’ biofuels. Producing that level of second generation biofuels will require a minimum of 150 biorefineries capable of producing 100 million litres per year.

The cost of building a single biorefinery of that scale runs to somewhere between €150-€300 million, suggesting a minimum total bill of more than €25 billion to meet the ambitions implicit in REDII.

Because of the EU Commission’s guerilla war against biofuels since the start of this decade, EU investor confidence in biofuels has been completely undermined. Banks and institutional investors who have been burned by policy changes are going to be very difficult to re-engage.

The elephant in the room is ‘where is the billions in funding needed to fulfill the REDII pipe dream to come from’?

Some have suggested the EIB might step in. To date, EIB has accounted for less than 0.1% of all capital investments in Europe’s biofuels sector.

A survey released in October last by the German Biofuels Producers [VDB] gives an insight into the rock bottom level of investor confidence in REDII.

Conducted amongst key industry players, the survey found:

81% of the survey participants believe that the reduction in support for conventional biofuels will cause a reduction in investor confidence.

65% of participants did not believe that the Commission proposals would incentivise sufficient investment in biofuel production,

All of the respondents believed that the REDII proposals needed to change in order to sufficiently incentivise investment in the sector to meet the advanced biofuel target.

In addition, 54% of the companies surveyed indicated that they were not planning to invest in biofuels, assuming the REDII proposals are transposed into law. None of the companies surveyed had at the time of the survey committed funds to biofuel investment.

A similar survey amongst institutional investors would be very interesting.

The future for ‘advanced biofuels’ has also been raised outside the EU.

The F.O Licht ‘World Ethanol and Biofuel Report’ issued on 19th February concludes its examination of advanced biofuels on a negative note – “so far, the performance of advanced biofuel producers is weak, even on markets with a specific mandate like the United States or other advantageous provision in the biofuels legislation, such as double counting in the EU.”

Against this background, there is no remote possibility that the level of investment needed to scale up to the implicit REDII level will be available in Europe in the foreseeable future.

Without private investment the policy being pushed in REDII will fail: the EU ‘co-legislators’, the Council and the Parliament are being walked into a policy cul-de-sac by the Commission.

The Commission’s impact assessment looks at the cost of the REDII proposals in a manner that can most charitably be described as incoherent.

Ignoring market realities, the Commission assumes, with little corroborating evidence, that advanced biofuels will be cheaper to produce and put on the market than conventional biofuels.

It ignores the prevailing low market price for conventional biofuels and for conventional biofuel feedstock and ignores the reality that there is a major market in Europe for the co-products of conventional biofuels.

It also presumes that the market price for conventional biofuels will rise while the price for advanced biofuels will fall. Again, there is absolutely no evidence to support that notion.

Another striking weakness in the Commission’s ‘analysis’ is an assumption that existing conventional biofuel refineries can easily be converted to the production of advanced biofuels. This is the equivalent of suggesting that sticking batteries in a clapped-out Volkswagen could avoid the capex needed to transition to electronic cars. The Commission, which has no expertise in the area, has not asked the biofuels industry whether that line of thinking has any merit.

The Commission also suggests that the overall costs of transiting from conventional biofuels could be mitigated by collocating the new bio-refineries on the sites currently occupied by the bio-refineries that the Commission wishes to phase out. Again there has been no consultation with existing operators and no consideration has been given to the question as to how operators who are being put out of business are to find the hundreds of € millions required to build new facilities.

The question of feedstock raises another matter. The logical place to locate a biofuel facility is as close as possible to its raw materials. Doing so cuts the transport costs and the associated environmental costs of biofuel production. A presumption implicit in the Commission’s views about collocating first and second-generation plants is that feedstock share a common geographical origin. This is at odds with reality. Again, the Commission has not engaged with the biofuels industry on this aspect of its ‘thinking’.

Finally, the Commission makes the proposition that advanced biofuel facilities are cheaper to build than conventional biofuel refineries. This proposition clashes with reality. Conventional biofuels plants have capital costs ranging from €0.10/litre for simple biodiesel to up to €1/litre for the most sophisticated ethanol plants.

The range is clear and proven over tens of billions of litres of actual capacity. In contrast, no advanced biofuel plant even comes close to the €1/litre mark, and most are very significantly higher. As a general rule of thumb, 100 million litres of biodiesel capacity costs less than 10% as much to build as 100 million litres of advanced biodiesel capacity.

Another reality that the Commission’s proposition ignores is that over the last decade in Europe, very few of the ‘advanced’ biofuel facilities that have been created have stayed open. There are more closed advanced biofuel plants in the EU than open ones.

In addition to the direct costs of transiting from conventional to ‘advanced’ biofuels, there are other, indirect, cost implications. These have not been properly aired in the debate.

The potentially devastating impact of removing an income stream worth billions annually to European farm families has been brushed aside in the debate as have the impact of draining this income from the rural communities. The abject failure to fully examine these impacts is perhaps the single most scandalous aspect of the REDII ‘debate’ in the EU Parliament.

The Commission has also made no serious attempt to measure the cost of its proposals in terms of either the number of current jobs that will be axed if REDII is enacted or of the job creation potential that will be lost by ending EU production of conventional biofuels.

The biofuels industry organisation ePure calculated that REDII will bring about the loss of over 100,000 existing jobs, a figure that the Commission has not disputed. It is shameful that the Commission has not been tied down on the jobs issue.

There has also been no attempt to measure the cost of REDII in terms of the rural development potential that will be suppressed by the Commission proposals. This point is particularly important in the case of Central and Eastern EU member states that have a huge unrealised potential to produce highly sustainable, low ILUC, conventional biofuels on land that is currently underutilized.

Across the EU 500,000 hectares of arable land is being abandoned annually as farmers give up farming. Over the last decade, the major market force that has pushed against this sad reality has been first-generation biofuels. Getting rid of first-generation biofuels will have huge social and economic implications for rural areas.

Another cost that has been overlooked in the debate is the impact that phasing out conventional biofuels will have on EU animal feed protein.

GMO-free high protein feed is a co-product of conventional biofuel production. Europe is currently heavily dependent on imported animal feed. Over the past decade, 25% of EU feed deficiency was cut by conventional biofuel production. The REDII proposals will reverse the clock making the EU more dependent than ever on GMO based imports. Ironically the EU Agricultural Commissioner has recently announced a programme that is aimed at addressing the EU protein feed deficiency, a classic example of the silo thinking that reigns in the Commission.

The REDII proposals are a shambles. By any objective standard, the proposals are ill-conceived, flawed and based more on hope than on hard science or on business reality.

The best service that the co-legislators in the upcoming trilogue could do for the citizens of Europe at this point sends the whole sorry mess back to the Commission – or better still put it through the shredder.